Chapter 19 - The need for a statement of cash flows

Question 1

What is a statement of cash flow?

Answer 1

shows how the entity has generated and used cash and cash equivalents during the period

Question 2

What are the benefits of a SOCF?

Answer 2

• Helps users of accounts to assess the ability of the entity to generate cash
• helps users of accounts to compare the performance of different entities, because comparisons of cash flows are not affected by differences in accounting policies between entities

Question 3

What does the IAS 7 require for SOCF?

Answer 3

requires companies to report cash flows for the period classified by cash flows from operating activities, investing activities and financing activities.

Question 4

what are cash equivalents?

Answer 4

consists of short-term, highly investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value

Question 5

what is cash?

Answer 5

consists of cash in hand and demand deposits

Question 6

what are cash flows?

Answer 6

Cash flows from operating activities are the cash flows associated with the main revenue-earning activities of the entity

Question 7

What are examples of cash flows?

Answer 7

cash receipts form the sale of goods or services
cash receipts from sources such as royalties and fees
cash payments to suppliers for goods and services

Question 8

Interest payments can be classified as what?

Answer 8

as either an operating cash flow or a financing cash flow

Question 9

interest receipts and dividend receipts can be classified as what?

Answer 9

as either an operating cash flow or an investing cash flow

Question 10

dividend payments may be treated as what?

Answer 10

either a financing cash flow or an element in the cash flows from operating activities

Question 11

IAS 7 allows cash flows generated from operations to be presented in which 2 ways?

Answer 11

Direct and Indirect method

Question 12

What is the direct method?

Answer 12

Cash receipts from customers X
Cash paid to suppliers (X)
Cash paid to & on behalf of
employees (X)
= Cash generated from Operations

Question 13

The indirect method of presenting cash flows from operating activities is based upon what?

Answer 13

information already available within the annual financial statements

Question 14

The direct method of presenting cash flows from operating activities is based upon what?

Answer 14

Cash flow information extracted directly from the accounting records to classify cash flows

Question 15

What is the indirect method?

Answer 15

Profit before tax X
Depn charge X
Profit on disposal of PPE (X)
Increase in inventories (X)
Decrease in receivables X
Increase in payables X
= cash generated from operating activities

Question 16

What are investing activities?

Answer 16

Related to sale and purchase of non-current assets

Question 17

What are financing activities?

Answer 17

Related to issue and redemption of equity and loan finance

Question 18

What are cash payments in relation to investing activities?

Answer 18

cash payments to acquire property, plant and equipment
cash payments to acquire intangible assets and other long term assets
cash paid for a long term investment

Question 19

What are cash receipts in relation to investing activities?

Answer 19

Cash receipts from the sale of property, plant and equipment
cash receipts from the sale of intangible non- current assets
Dividends/interest received

Question 20

What are cash receipts in relation to financing activities?

Answer 20

• cash proceeds from issuing shares
• cash proceeds from a loan or issue of bonds/debt securities

Question 21

What are cash payments in relation to investing activities?

Answer 21

• cash payments to redeem/buy back shares
• cash payments to repay loan or redeem bonds/debts securities

Question 22

What are cash inflows?

Answer 22

into bank

Question 23

What are some e.g’s of cash inflows?

Answer 23

interest received
dividends recieved
proceeds from disposal of property. plant and equipment

Question 24

what are cash outflows?

Answer 24

out of bank

Question 25

what are some e.g’s of cash outflows?

Answer 25

cash paid for purchase of property, plant and equipment